Deficit Spending and Debt: Lessons from Japan

Kazumi Funahashi /
December 14, 2012

Deficit spending does not foster economic recovery. The U.S. and the world need to recognize the stagnation and inter-generational inequality caused by such spending, and for reference, they need not look further than Japan’s recent history of deficits.

In addition to its two lost decades, Japan’s heavy borrowing means the current working generation will receive considerably more in lifetime net benefits than will future generations who bear the greater debt burden. Japan’s example shows that the only way to address a fiscal crisis is to reduce spending and debt immediately.

Japan’s fiscal situation is abysmal. On November 13, Japan recorded a 3.5 percent annualized GDP decline, the worst since the March 11 earthquakes and tsunami. On November 16, the Japanese Diet permitted the government to sell up to 37 trillion yen ($468 billion worth of bonds). As of September, Japan’s outstanding national debt is 980 trillion yen ($12 trillion). Despite over two decades of massive government stimulus, Japan’s economy has not budged—it is the same size as the early 1990s.

Japan needs to act immediately to reverse its fiscal direction. In Japan’s National Budget: Time to Give Up on Keynesianism, Heritage’s Derek Scissors and Kumi Yokoe propose immediate budget reform to edge away from the delusion of “how…demand stimulus will boost a GDP that has not grown in almost 20 years, targeting a balance only on the general account when revenue cannot support half of total spending.” Japanese lawmakers, however, refuse to cut spending because terminating many government programs is considered political suicide. So lawmakers falsely promise that government action will fix the economy.

Plenty of evidence exists showing that the U.S. is dipping into the same fiscal morass. Total U.S. national debt is $16.3 trillion. The U.S. recorded 2.7 percent annualized GDP growth in the third quarter, putting GDP at $15.8 trillion. The debt–GDP ratio of 103 percent is the highest since the end of World War II, and will continue to increase dramatically in the future without substantive policy changes.

The U.S. government will exhaust it’s ability to borrow money in about February after reaching its $16.4 trillion limit this year. Stunningly, the President also requested that Congress transfer debt ceiling authority to him so that he can routinely raise the debt limit without any negotiations, trade-offs, or input from Congress. This would be an unprecedented and unwise transfer of power to the executive branch.

Cutting spending and balancing the budget will be painful, but it will pave the way for future growth—growth which will never occur if heavy borrowing continues. Japan could take decades to return to sound economic performance, if it ever does. The U.S. and Europe have only one foot in the grave; they can act now to implement spending cuts, reform entitlement programs, and escape Japan’s scenario.